HTG Molecular Diagnostics, Inc.
Q3 2017 Earnings Call Transcript

Published: 8 Nov 2017

[Operator:]

Good day, and welcome to the HTG Molecular Diagnostics’ Third Quarter 2017 Earnings Call. Today’s conference is being recorded. There will be a question-and-answer session at the end of today’s presentation and instructions on how to ask the questions will be given at that time. At this time, I would like to turn the conference over to your Ashley Robinson from LifeSci Advisors. Please go ahead.

[Ashley Robinson:]

Thank you, Melinda. Earlier today, HTG released financial results for the third quarter ended September 30, 2017. Before we begin the call, let me remind you that the Company’s remarks include forward-looking statements within the meaning of federal securities laws, including statements regarding expected revenue and other benefits from pharma collaborations, possible additional collaborations from existing pharma customers, revenue and operating expense –expectations for the full-year 2017 and expected improvement in gross margins. These forward-looking statements are subject to numerous risks and uncertainties, many of which are beyond HTG’s control that may cause HTG’s actual circumstances, events or results to differ materially from those projected on today’s call. Factors that could cause events or results to differ materially include those risks and uncertainties described from time-to-time in HTG’s SEC filings. HTG cautions listeners to not place undue reliance on any forward-looking statements. HTG is providing this information as of the date of this call and HTG undertakes no obligation to update any forward-looking statements. With that, I would like to turn the call over to T. J. Johnson, President and Chief Executive Officer. T.J.?

[T. J. Johnson:]

Ashley, Thank you. Good afternoon everyone and thanks for joining us on our on our third quarter conference call. On today’s call, I will provide a summary of significant progress that we’ve made this quarter in our business and provide additional color on the continued building momentum toward our long-term goals. I will also provide a view of the remainder of 2017 and then turn the call over to our CFO, Shaun McMeans. Shaun will review our third quarter financial results. After that, I will make some closing comments and then open the call to your questions. Let me begin by saying, we are extremely pleased with the progress we have made this quarter, which we believe demonstrates strength in each of our customer segments especially our pharma business. I want to emphasize that a key to our long-term value creation is developing diagnostic menu for our platform via companion diagnostic partnership. We believe this is a capital efficient strategy to build high value diagnostic menu to propel future sales of our EdgeSEQ instrument and consumables as the companion drug achieve adoption. This quarter we initiated development activities in two clinical assay programs generating significant growth in our collaboration revenues. We are optimistic both programs will lead to further development opportunities and possibly commercialization of companion diagnostic assays. We now have three customer clinical assay development collaborations, two of them under our master agreement with QIAGEN. Our master companion diagnostic agreement with Merck Darmstadt was completed prior to our exclusive agreement with QIAGEN. We expect to complete clinical testing in one or more of our collaboration based assays in development and begin regulatory submissions in 2018. Assuming successful regulatory approvals we could see corresponding instrument reagent kit sales as early as 2019. Our pharma pipeline continues to strengthen and we’re working on opportunities for additional clinical programs in the coming quarters. Revenue recognition from our collaboration programs is difficult to forecast on a quarterly basis as many factors are not in our direct control. However, given our performance thus far and taking into consideration our expected milestone this quarter. We now estimate an increase of full year revenue to between $10 million and $13 million. We realize this is a fairly broad range, but this is due to the fact that an increasing portion of our business is tied into clinical assay programs with our pharma customers. A shift in our work under any single collaboration program could impact our revenue recognition in any one fiscal period. While our primary focus continues to be late stage pharma drug development programs our RUO research-use-only profiling business is contributing growth led by our microRNA and Oncology Biomarker Panel assays. These assays are being used in retrospective studies and translational research and academic medical centers and in pharma. We have new profiling assays in early stage development and while we have not yet set a specific launch date we will be targeting sometime in early 2019. Overall we are just extremely pleased with the state of the business and our organization is excited about the momentum that we’ve built. I’ll now turn it over to Shaun for the financial results.

[Shaun McMeans:]

Thanks T. J. Our Q3 revenues were $1.7 million, bringing our nine months 2017 revenues to $6.9 million, reflecting an increase of 307% and 87% respectively over the same period last year. Product revenues increased to $0.6 million in Q3 compared to $1.5 in Q3 2016. Following T. J.’s earlier comments, our Q3 revenues demonstrates the substantial progress our company has made with respect to the pharma collaborations announced earlier this year. We believe we have enough visibility into these existing clinical programs to provide full year 2017 revenue guidance in the range of $10 million to $13 million. This guidance reflects our expectation of further revenue growth in the final quarter of 2017. Consistent with significant growth in our pharma revenues, our operating expenses have increased by $1.9 million over Q3 2016, primarily reflecting expenses directly attributable to development service costs incurred in relating to our pharma clinical programs. Selling, general and administrative expenses were slightly higher in Q3 compared to Q3 2016, mainly attributable to compensation expenses. Total nine months operating expenses remain lower than those 2016, however we do expect OpEx spending to increase in Q4, as we continue to increase activities associated with our pharma clinical programs, invest in sales and marketing programs and headcount and continue ALK Plus clinical diagnostic commercialization in Europe. We believe full year 2017 operating expenses will be in the range of $25 million to $28 million range, with variability driven by clinical program, development costs and timing uncertainties as T. J mentioned earlier. We continue to invest into organization to meet expected service activity growth from our pharma clinical programs and nonclinical program activity. Our gross margins have increased significantly to $2.6 million in Q3 from negative $0.2 million in Q3 2016, driven by the revenues from our pharma clinical programs. However the cost associated with our pharma clinical program activities are reported in operating expenses as development costs. Operating expenses associated with pharmaceutical revenue amount of $2.2 million for Q3 $0 for Q3 2016. We generally expect these associated costs to be greater as a percent of revenue during the early phases of our work with each of our pharma customers. We have not recognized profit sharing revenue from our pharma clinical programs through Q3, which is expected to increase our operating margin as a percent of revenue in future periods. Our operating loss for Q3 was $5.1 million compared to $6.1 million in Q3 2016 net loss per was $0.46 for Q3 and $0.92 for Q3 2016 and reflects $4.1 million additional shares issued in 2017 from the sale of equity through September 30. We ended Q3 with $9 million in cash equivalents as of September 30 have raised $17.4 million approached proceeds from our ATM facility. October 26, we received proceeds of $3 million from the issuance of the subordinated convertible promissory note. In summary, we believe our Q3 and nine months results demonstrate progress towards the same revenue growth and continue to prudent cash management. I look forward to reporting additional progress on our future earnings calls. At this point, I would like to turn the call back to T.J.

[T. J. Johnson:]

Thank Shaun. As discussed, we feel that this past quarter was very productive with sizable contributions from our new pharma clinical projects, but we also had other notable accomplishments. First commercialization of our HTG EdgeSeq ALKPlus, the USA is underway in Europe and the initial customer feedback is promising. A lead customer recently presented initial data at European Congress of Pathology Conference indicating an excellent performance in comparisons with our clinical standard method. While earlier at our commercialization process positive comments from a lead customer on the simplicity of our workflow, low sample input, and low assay failure rates is encouraging. We continue our efforts to develop performance comparison data in multiple lead customer sites, which we expect will assist in our reimbursement efforts. We are currently assessing our 2018 revenue plans, we do expect to fascinate to be a catalyst for instrument placement in reagent sales next year. As recently announced, we plan to finish the activities required for completion of our module for of a U.S. PMA for HTG EdgeSeq ALKPlus Assay in Q1 2018 with the plan Q2 submission. Additionally, I’m often asked about HTG’s ability to compete in the liquid biopsy market. I believe it’s important to note that we already compete in this market with approximately 25% of our 2013 revenue projected to come from profiling of liquid biopsies, including plasma, serum isolated exosomes and fluid sales. Our lead product in this market is our HTG EdgeSeq microRNA Whole-transcriptome, but we are seeing increasing customer adoption. We certainly see shorter term growth opportunities with research applications in liquid biopsies. And more importantly longer term growth opportunities in future liquid biopsy based diagnostic assays based on HTG technology is that market matures. So in closing, we believe we’re very well positioned for a strong finish to 2017 with momentum carrying into 2018 and beyond. Our pharma clinical program pipeline and strengthening we have a number of academic medical center collaboration that could lead to diagnostics menu the HTG EdgeSeq ALKPlus EU launches underway and we see the opportunity for further catalyst. I’d like to end by thanking the HTG team for your contributions and commitment to the company and to our investors for continued support. For those of you who would like know about HTG in our initiatives we’re presenting at the Canaccord Genuity Medical Technology and Diagnostic Forum on this Thursday 11

[Operator:]

Thank you. [Operator Instructions] And we’ll go to Mark Massaro, Canaccord Genuity.

[Mark Massaro:]

Thank you. Thanks T.J. Congratulations on the decent quarter. I wanted to start on the split between product revenue and services revenue, it looks like the product revenue is up, and I was just hoping if you could. Clarify if you were able to sell a couple of EdgeSeq instruments in the quarter?

[T. J. Johnson:]

We were. We now have 31 capital sold instruments Mark in the field. We have three that are under a rental wrap arrangement. Four instruments in key opinion leader sides, and five under evaluation, we’ve also now reached seven instruments placed in Europe.

[Mark Massaro:]

Great. That’s really helpful. Can you give us an update on the size of your global sales force and whether or not you have the majority of the country covered at this time?

[T. J. Johnson:]

Yes. We’ve recently increased slightly the amount of direct sales coverage both Mark, here in the U.S. and in Europe. We’ve got a couple more positions that we plan to fill. But we’ve been pretty close to where we plan to exit this year and enter into 2018. We have approximately as far as dedicated those folks in the field direct sales, eight in the U.S. and four in Europe. And then we have the associated sales support in field application scientist, service engineers and field management.

[Mark Massaro:]

That’s helpful. As we think about the consumable revenue it looks like it was flat at roughly 400,000 in Q3 about sequentially. Can you give us thoughts on whether or not you think that can pick up meaningfully near term or should we really be thinking about the business really being driven more on the pharma collaboration side?

[T. J. Johnson:]

Yes. I think it’s for sure the ladder. We do expect Mark that we’re going to see some steady growth on product sales been driven by our research profile of business. So as our OPT [ph] panel or microRNA panel, or immuno-oncology panel continue to gain customer adoption, we’re confident that we’ll see growth, but those revenues are in the research world, so they’re very project dependent and therefore more bumpy or lumpy than while you would expect from a classic razor/razor blade annuity model based on diagnostics. We believe next year we’ll start to see initial effect on our product revenues as the outputs E.U. as the starts to gain traction in clinical labs in Europe. And then obviously the next catalyst we believe for us and driving more toward the classic product razor/razor blade revenue model will occur as we finish our PMA for the – here in the U.S. and potentially launch our first companion diagnostic assays based on the collaboration that we’re now in the midst of on the pharma side and we would time those for 2019 catalysts.

[Mark Massaro:]

Yes, understand. And thanks for the update on the PMA submission, I guess my question is, can you share any feedback or responses you’ve received from the first three modules you’ve submitted to the agency?

[T. J. Johnson:]

Yes, it’s all been positive, I believe our first two modules of completed full review. Our module three, were still in back and forth responding to questions. We would hope to have those cleared by the end of this quarter. So that as we entered Q1 2018 were purely focused on the module for submission and then module four review by FDA and as we’ve discussed before our expectation would be because we’ve completed the majority of their review of the prior three modules, we would be hopeful for a fairly rapid review on the final module.

[Mark Massaro:]

Okay. And then my final question is just on the balance sheet. Can you share how much is left on the ATM vehicle that you have left if any and just give us thoughts on – I know you’ve kind of give some comments around OpEx, but I was just hoping to kind of refined levels of OpEx and say Q4 into 2018?

[T. J. Johnson:]

Yes, sure. Our total ATM amount is $40 million of which has Shaun indicated we’ve drawn down just under $18 million of that. But we have a little in excess of $22 million more with which to utilize on the existing ATM our total shelf is $75 million. So we have quite a bit of room underneath both. As far as OpEx spending we’re continuing to stay very cash prudent. Most of our investment Mark that we’re currently putting into the organization is rapid uptick and development resources to support the growing volume of work that we have with our pharma collaborations. Obviously we’re providing some resources in other areas of the company, but at very, very modest levels. So we would expect to see modest uptick in Q4 and even Q1 next year, but not significant.

[Mark Massaro:]

All right that’s it for me. Great quarter. And I’ll see you later this week.

[T. J. Johnson:]

Mark, thank you.

[Operator:]

[Operator Instructions] And we’ll next go to James Tannahill, H.C. Wainwright & Co.

[James Tannahill:]

Hi, thank you for taking my question. I’m on the phone for E10. My first question is the ALKPlus Assay PMA module for us still on track to be submitted in second quarter 2018?

[T. J. Johnson:]

It is.

[James Tannahill:]

Okay, great. Could you provide a more specific timeline for completion of the development activities under your newly initiated second statement of work with QIAGEN?

[T. J. Johnson:]

Yes, unfortunately that’s all confidential information James, and I’m just not able to provide more clarity on that. But we are definitely in a uptick and ramp up as far as our development activities associated with both of our programs.

[James Tannahill:]

All right. Thank you so much.

[T. J. Johnson:]

You are very welcome.

[Operator:]

And there are no additional questions in the queue at this time. I will now turn the call over to T. J. Johnson, CEO of HTG for any additional or closing remarks.

[T. J. Johnson:]

I have no additional remarks other than too. I thank everyone for their participation on the call today. And have a great evening.

[Operator:]

Thank you. And that does conclude today’s conference call. We thank you all for joining us.